Chapter 17 Flashcards
(26 cards)
What is a Forward Contract?
An agreement to buy or sell an asset in the future at a set price
What is a Futures Price?
The set price that will be paid when the futures contract ends (at maturity)
Who do forward contracts protect and from what?
who –> both the buyer and the seller
what –> price fluctuations
What is a Long Position?
the futures trader who commits to PURCHASING the assets
What is a Short Position?
the futures trader who commits to DELIVERING the asset
Why is futures trading considered a zero-sum game?
Because every dollar one trader wins, another trader loses
the total gain is always zero
What are Single Stock Futures?
a futures contract on the shares of an individual company
What are the four categories futures and forward contracts are traded on?
- agricultural commodities
- metals and minerals
- foreign currencies
- financial futures
What is the role of a clearinghouse in futures trading?
It acts as a middleman between traders to ensure trades are carried out smoothly and safely
What is a Reversing Trade?
when you close your position by taking the opposite side of the same contract
What is Open Interest?
the number of contracts outstanding
true of false: Futures Contracts rarely result in actual delivery of the underlying asset.
TRUE
What is Marking to Market?
updating futures accounts every day to reflect gains or losses from price changes
What is Maintenance Margin?
The minimum account balance a trader must keep. If it falls below this, a margin call is triggered
What is Convergence in futures trading?
When the futures price and the spot price become equal at the contract’s maturity
What are Cash Settlements?
When the contract is settled by paying the cash value of the asset instead of delivering the actual asset
What is Basis?
the difference between the futures price and the spot price
What is Basis Risk?
Risk from unpredictable changes in the difference between the futures price and the spot price
What is a Spread (futures)?
Holding a long futures position and a short position with different maturities on the same asset
What is the Spot-Futures Parity Theorem or Cost-of-Carry Relationship?
The ideal relationship between spot and futures prices. If it’s violated, traders can profit through arbitrage
What is Index Arbitrage?
A strategy that profits from differences between actual futures prices and their fair value, aiming for risk-free profit
What is Program Trading?
Using computers to buy and sell lots of stocks at once, usually to profit from small price differences
What is a Price Value of a Basis Point (PVBP)?
How much a bond’s price changes when its yield changes by 0.01%.
What is Cross-Hedging?
Reducing risk by hedging with a different but related asset
